Under the settlement, the state’s unfunded pension liability would fall to $5.05 billion, down from an unfunded liability that approached $9 billion before reform action was taken from 2009 to 2011. The state’s reform had originally called for paring the unfunded liability to about $4.8 billion.

How do we know that these billions of dollars in savings will materialize and Rhode Island pensions will be saved?

Because some actuaries said so in a report using methods consistent with industry standards including the three big lies of public pension actuarial prognostication:

Lie 1: We will get to 100% funding: If you can locate the funded ratios among the hundreds of numbers these reports manage to squeeze onto one page you will see ratios in the mid-50% range in 2013 turning to 100% around 2035* assuming all assumptions are realized. How is it possible for a plan that gets to 55% funding (likely an understated number anyway) to get back to solvency with the same sponsor who got the plan here in essentially the same fiscal situation, if not worse? And about those assumptions……

Lie 2: One interest rate in perpetuity is fine: How is a mature plan going to get the same 7.5% interest on its total fund both when it is (a) severely underfunded and has to pay a substantial portion of that money to retirees and (b) fully funded and all that extra money that magically appears is available for long-term investing? It is completely illogical but has the significant advantages of (a) being easy to program in a spreadsheet and (b) coming up with the numbers your client wants shown.

Lie 3 Being a member of the American Academy of Actuaries means something for public pension funding: The GRS cover letter provides their qualifications for giving this opinion:

We certify that the undersigned are members of the American Academy of Actuaries and that we meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinion contained herein.

* Every projection study ever done for a public plan always has the plan getting to 100% funding at some point in the distant future, usually when anyone reading the report at the time would be long dead. Now that we have a history of these reports it would be interesting to see if there has ever been one that got anywhere close to being right.

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34 responses to this post.

John, your observations as to never reaching the promised 100% funding tie directly to the “moral hazard” near impossible to overcome when you mix politicians with large amounts of money …. and one of the best reasons why DB Plans should be replaced with DC Plans in the Public Sector, just as they have been in the Private Sector.

Under DC Plans, promises get met,Taxpayers of one generation appropriately pay for the services provided to THAT generation, and providing pensions/benefit more than you can afford is near impossible. Hard to not agree that all of this is desirable and appropriate, and it also speaks volumes about “greed” that virtually all Public Sector Unions/workers ferociously fight such conversions.

Sorry– I disagree. 100% funding is not the solution but an arbitrary target…Public plans can operate indefinitely at substantially less than 100% funding. If you view the unfunded liability as a mortgage (as many do) then all that is sufficient is to pay the interest. Any principal reduction is welcome but not necessary… Sure they are big numbers but the plans stay solvent.. and that is what is needed. New GASB rules will scare the daylights out of any public plan sponsor that doesn’t fund properly, but plans can operate without a principal reduction.

Thank you for your input and it is welcome. I hope you comment more often.

I see 100% as sacred and any deviation as necessitating immediate action presuming all assumptions are reasonable (as opposed to politically dictated). Generational equity is one reason but, for public plans, there is also the very real possibility that participants will lose a large portion of their benefits (Prichard, Central Falls, COLA-removal states, Detroit to come) and actuaries would be abetting that theft by their professional silence. It’s not that actuaries are stealing anyone’s benefit – that is being done by the politicians – but allowing it to happen.

While technically, a Plan could exist for a very long time without paying down the principal, but would it be prudent or fair to the taxpayers whose contributions (and the investment earnings thereon) typically pay for 80-90% of total Plan costs?

It MIGHT be reasonable if we had a multi-generational “Stationary Population” (a concept you should be familiar with) so that taxpayers of each generation pay a fair cost for the services actually received (even though not to those who rendered those services). However, with the HUGE baby boomer generation followed by a MUCH smaller generation, with that generation followed by a “boomlet” (the wave of births from the large baby-boom generation), that’s hardly the situation we are in now or for perhaps the next 75 years.

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And quoting…”New GASB rules will scare the daylights out of any public plan sponsor that doesn’t fund properly”.

“Nothing against the good folks at the American Academy of Actuaries (AAA) but their 17,500 membership roster includes fellows in the Institute of Actuaries of Australia and members of the Colegio Nacional de Actuarios in Mexico. Again, probably good people but are they qualified to render an actuarial opinion on public plans in the United States”.

Obviously you are not familiar with the qualification standards of the AAA and all of the other actuarial organizations, even though you hold yourself out too be an actuary. An actuary cannot make such a statement unless he/she meets the relevant qualification standards to issue the opinion. Actuaries have been disciplined because they were not qualified to issue certain opinions.

This has been a pet peeve of mine and is sprinkled throughout this blog. Yes, GRS, Segal, and other actuaries are following industry standards in valuing public plans but consider what those standards allow:
1) Interest rates dictated by politicians;
2) Actuarial value of assets that always seem to be 20% over market
3) Open amortization

All designed to lower contributions and jeopardize the benefits being promised.

I believe the AAA has spoken out against the 80%-being-OK myth but what about these gimmicks that they silently approve?

maybe a dumb question JB1, if the funding ratio is at 60% this year and stays 60% next year and still 60% the year after, wouldn’t that mean that it is fully funded, cash in =cash out. if it was 60 then 59 then 58, then the attrition would mean its not fully funded, right. What is happening to ours or anyone elses plans now? Why would one have to worry about being 100% when there is a subsistence level being maintained.

Not a dumb question at all and the answer would be tied to the assumptions use.

In theory the funded ratios of these plans should be increasing since the contributions consist of the cost for the year plus an amount to amortize any underfunding. The problem is that funding levels are going down because the assumptions are so horrendously bad (from pretending you have more assets than you do to using an interest assumption that is impossible to achieve for plans that have so much need for liquidity) that the undervaluing of liabilities intended to keep contributions low actually increases the underfunding as those ridiculous assumptions are not met.

If everyone realized the pathetic situation the New Jersey plans are in maybe there could be a serious discussion. To that end I will be presenting a Powerpoint slideshow with videos to a group of retired policemen next week and since the slides are mostly ready I was going to test it out on this blog later today if I get Powerpoint onto WordPress.

The funding ratio is the division of the “PRESENT VALUE” of already-earned PAST-service liabilities (i.e.,expected future payouts) by current Plan assets (sometimes “actual market value”, and sometimes “smoothed”, but that’s another story). By being the PRESENT VALUE, the actual dollar amount of expected payout is ALREADY discounted for payment in the future (interest) and survivorship to each next payment date (mortality).

As such, being fully funded means having 100% of the assets to fund that PRESENT VALUE in hand TODAY. Of course there is no single correct number that represents 100% because many assumptions go into this calculation.

As to your last sentence, I suggest you take a look at the Academy Report Ilnked in my earlier comment.

OK, let’s go back to some basics to clear some things up. Actuaries made two big mistakes in not explaining the following 2 terms–Unfunded Liability and Net Investment Return assumption. First, the Unfunded Liability is not a Liability in the accounting sense. It is a Present Value calculation or an accumulated value depending entirely on the Actuarial Cost Method used. Actuarial Cost Methods are simply methods chosen (or legislated) as budgeting approaches, One fund can be 80% funded using one actuarial cost method and 70% funded using a different actuarial cost method. Therefore, funding percentage is a useless way of comparing pension funds. The assumptions and methods must be identical to say one fund is better funded than another. There really is no Investment return assumption–it is simply a discount rate on future estimated payouts. (all possible payouts!!). Actuaries do not make estimates of what returns the assets will achieve as part of the funding process. They make estimates of how much will be needed to provide future possible pension payments.

With regards to the “rate of return” being unreasonable. Picture yourself approximately 30 years ago in 1985-espousing a 3% investment return assumption to be used in funding a public retirement plan. Money market rates were 17%.

So when actuaries speak of long term they mean long term…60 years or so, or as I like to say in my public consulting clients (and yes that is all I do to the critic who commented), the period runs from the time the youngest participant receives his last pension payment…

Make the contributions the actuary recommends and the plan will stay solvent and achieve a stable funded position. Cost methods are self adjusting. Stop worrying about funded percentages and start worrying about funding policy.

(1) WHY are the funding standards (historical GASB, but now better under the new rules) so much more liberal than those required of Private Sector Plans (ERISA, 2006 PPA, etc.)?
(2) Why is the rate used for discounting Plan liabilities in Gov’t Plan valuations (ONLY) equal to the assumed investment return when, as you said, investment returns are clearly a SEPARATE issue.
(3) Why can Gov’t Plan sponsors ignore actuarial recommendations (even ones that are clearly too low), sometimes contributing nothing (for years) while the already very low funding ratios declines annually ?
(4) And most importantly, why are Public Sector pensions & benefits so generous

Excuse me for answering my own questions, but the answer to all four is Unions & politicians ……. specifically, (a) the insurmountable moral hazard of mixing politicians with very large sums of money, (b) the insatiable greed of the Public Sector Unions/workers, and (c) our self-interested, vote-selling, contribution-soliciting, taxpayer-betraying elected officials more than willing to accept campaign contributions and election support in exchange for favorable votes on pay, pensions, and benefits, and a Taxpayer-be-damned attitude.

There is WAY too much focus on “funding” levels in most pension reform discussions … and how to raise them. That focus implies that we accept the promised benefit levels AS IS and move to funding THAT level of benefit promises. Well maybe that’s a big part of the problem.

The ROOT CAUSE of our States and Cities difficulties is not “funding” but grossly excessive Plan “generosity”. “Funding” follows “generosity”. Materially reduce that “generosity” and, given some time, the “funding” will take care of itself.

While making such reductions for PAST service accruals is indeed difficult, and in many places near impossible absent bankruptcy, there is absolutely ZERO justification for continuing the current (grossly excessive) level of pension accruals for the FUTURE Service of CURRENT workers, effectively digging the financial hole we are in deeper every day.

Such FUTURE Service accrual rate reductions for CURRENT workers are both legal and routine in Private Sector Plans. What makes Public Sector workers so “special” that they deserve MUCH greater pensions (MULTIPLES greater in value at retirement when considering BOTH the much richer formulas AND the much more generous Plan provisions … COLAs, very young full retirement ages, etc.), MUCH better benefits (e.g., free or heavily subsidized retiree healthcare), and MUCH greater protections from change than the Taxpayers who are responsible for all but the10-20% of total Plan cost typically paid for by Public Sector worker contributions (including all the investment earnings on those contributions)?

So this isn’t a debate on pension funding., it is a tirade against public employees. I represent only police and fire pension programs covering public employees who put their lives on the line every day protecting people just like you. And unfortunately I don’t represent the teachers who educate your children or the snow plow driver who cleared the road in front of your house last week or the city worker who fixed the pothole so you could get to work or the subway maintenance men who brought you to your job. Need I go on. This discussion is over from my end

Perhaps strong advocacy against the ROOT CAUSE of the problem (excessive pension/benefit generosity), but certainly not a tirade against the public employees themselves. While the politicians are primarily at fault for this mess, with a good share belonging to the insatiably greedy Unions, the workers mainly just benefited from the other’s collusion.

What you are describing are their job responsibilities for which they are very well paid in CASH alone, This a blog focused on NJ. Did you know that a police patrolman with 5-7 year’s experience typically makes $100-$120K in cash pay alone (plus overtime). What is the justification for layering on top of that a pension so generous that (to fully fund over their working careers) requires a level annual % of pay Taxpayer contribution of 35-50% of pay (the higher end being necessary if NJ’s COLAs are reinstated) when Private Sector Taxpayers typically get their employer’s 6.4% of pay Social Security contribution on their behalf plus 3-5% of pay into a 401K Plan?

And what did I say that’s not true, in this or my last comment? I’m quite willing and capable of debating that with you.
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No offense intended, but I get the distinct impression that your apparent support for the VERY generous pensions afforded these workers, together with an apparent lack of concern for the extraordinarily poor current funding level may be colored by the source of your income ….and desire not to rock-the-boat and endanger future engagements.

The compensation level for public employees and the mix of such compensation between current and deferred compensation is a matter of public policy and is up for debate. What is reprehensible about Rhode Island, Colorado and other states is two fold. First is the failure to fund even the amount calculated using the generous actuarial standards and the silence of retirement systems about this. Second, is the contract violation involved in retroactively changing the benefit of the already retired. Both of these are fundamental breaches in sound financial practice and the rule of law.

Why is a retroactive REDUCTION in pensions any less reprehensible than a retroactive INCREASE in pensions (as is often done, e,g.,CA, NJ) …. because the former impacts Union-represented, well-organized Public Sector workers and the latter impacts the mostly-disorganized Taxpayers ?

Richard, I didn’t make a statement, I asked a question……. and my question should be considered in the context that Public Sector worker pensions even BEFORE their retroactive increases were ALREADY (taking into account BOTH the MUCH richer “formulas” and the much more generous “provisions”) considerably greater in value at retirement than those of comparable Private Sector workers making the SAME pay, having the SAME years of service,and retiring at the SAME age.

However, you feel about relative compensation levels, this does not justify breaking a contract with a retroactive cut. A retroactive increase may be ill advised but it doesn’t break a contract. At some point, we have to return to the rule of law.

Quoting …”A retroactive increase may be ill advised but it doesn’t break a contract. ”

While I agree (although I would likely choose stronger words than “ill advised”), it’s pretty hard to disagree that the “system” (and accompanying laws) have been structured to benefit Public Sector workers at the expense of Taxpayers, and few (if any) of the “protections” from reduction afforded Public Sector workers carry over to the participants in Private Sector pension Plans. Why is that appropriate ?

When I advocated for breaking a contract in this context, I’m addressing it from a “fairness” standpoint, not a legal one, and I hope we (the Taxpayers) can find a way around those legal barriers.

I’m guessing that you (or a family member) are either an active, vested-terminated, or retired Public Sector worker who is or will benefit from the current system …. so I understand your position and desires. As a taxpayer, I find this structure grossly unfair, and feel it necessary to advocate for change.

You are certainly free to advocate but be careful what you wish for. Breaking the rule of law has all sorts of unintended consequences most of which you will probably not like. There is a reason that the Founders wrote the language about impairment of contracts into the Constitution.

All of the contracts I have entered into were negotiated at arms length with the opposing parties looking out for their own best interests …. by spending their own money.

Unfortunately for Taxpayers, many if not most compensation contracts are negotiated with nobody at the “bargaining table” looking out for Taxpayer interests.

Sure,our “elected representatives” are “legally” representing the Taxpayers,,……. but (1) they are NOT spending their money, but rather the Taxpayer’s money (and hence have no “skin in the game”), and (2) far to many are driven NOT by what’s best for the Taxpayers, but by self-interest, which has evolved into the horse-trading of Public Sector Union campaign contributions and election support in exchange for favorable vote on Public Sector pay, pensions, and benefits.

As I said earlier ….. my focus is on “fairness”, and contracts negotiated under such circumstances are anything but “fair” to the Taxpayers who are told that the must pay for them

If all the kids on Disney right now can make music, why cant i? Unfortunately I’m not some Hot Teenage Boy that ppl fawn over or am the owner of a butt like Kim Kardashian’s and I know everyone hates these but if you’d check out my channel that’d be awesome. I used to literally sing in the dark since people can be jerks and I didn’t want people I kno to find out. Idc anymore, I just love music and that’s what matters. If you pop? by id appreciate it, if not that’s cool, thanks for even reading!

According to census figures total employment in Union County is at 202,372. According to New Jersey pension records 20,878 of those jobs are in government. Theoretically then 10% of the members of the Union County Democratic Committee should also be working in government to be representative of the general population. It’s not even close. When […]